China Released its Second Draft DAL Amendments to the Drug Administration Law

On 20 April 2019, the Standing Committee of the National People's Congress ("NPC") held a second deliberation meeting to discuss the Draft Amendments to Drug Administration Law ("Second Draft DAL Amendments"). A week later, the Second Draft DAL Amendments were published for public comments until 25 May 2019.

It is believed that one of the triggering events that prompted the Drug Administration Law Amendments is the widely reported vaccine scandal: it was revealed in July 2018 that Changsheng Life Sciences had produced inferior rabies vaccines and fabricated false production inspection records. Three months later the National Medical Products Administration ("NMPA") submitted a draft amendment to the Drug Administration Law ("First Draft DAL Amendments") to the NPC for discussion, that draft was soon released for public comments on 1 November 2018 (Please see our analysis of the First Draft DAL Amendments here). Upon receiving feedbacks calling for more substantial and structural revisions of the DAL to accommodate China's medical reform efforts, the Second Draft DAL Amendments propose additional changes with the following highlights:

1. Improving Drug Quality and Strengthening Drug Administration

A general principle provision has been added to indicate that drug administration shall adopt a health-centered approach, and a strict supervision system shall be established to improve drug quality and to ensure safety, efficacy and accessibility of drugs (Article 3).

The Second Draft DAL Amendments also encourage the joint efforts of the government, industry associations and the public to improve drug administration and supervision (Articles 11-13), including:

1. Local governments to take measures to improve the public's general knowledge on drug safety related laws and regulations;

2. Informed consent shall be obtained from the test subjects or their guardians after they have been provided with truthful explanation of the clinical trial and the relevant risks (Article 19);

3. Compassionate drug use: if a clinical institution is conducting clinical trial of a drug to treat life-threatening disease with no comparable treatment options, the drug being tested can be available free of charge to other patients with the same conditions in the same clinical trial institution, provided that the drug being tested is likely to have benefits, passed the ethical review and informed consent has been obtained from the patients (Article 20).

3. Market Authorization Holder ("MAH") System

Under the current DAL, only a drug manufacturer can obtain drug market authorization approval from the NMPA. In November 2015, China's State Council launched a 3-year pilot project to implement an enhanced MAH system in 10 provinces/municipalities including Beijing, Shanghai, Jiangsu, Zhejiang, Guangdong etc. Under this pilot project, the scope of MAH was extended from drug manufacturers to include R&D institutes and individual researchers, the MAH can commission a qualified manufacturer or distributor for production/sales of the drugs and shall be responsible for the safety and efficacy of the drugs. All these measures had been adopted in the First Draft DAL Amendments.

In October 2018, the State Council released a report[i] on implementation of the pilot project, under which they found that the market launch time of a drug can be reduced by 22 months on average if a MAH uses contract manufacturing, as it saves the time of a MAH (normally a drug R&D institute) for registration of a drug production company, building production facilities and obtaining GMP certification. The pilot project has also incentivized MA application of new drugs: 734 MA applications for new drugs were filed in 2017 with a YoY growth rate of 31.5%, of which 334 were innovative new drug applications (YoY growth rate 24.2%) and 90 applications were innovative biological products (YoY growth rate 109.3%). The report also revealed some issues, for example the MAH's responsibility at different stages of the drug life-cycle management process required further clarification; The pilot project has only been implemented for 3 years, but quite a portion of the MA applications received by the local drug administration involved in the pilot project require a longer time for granting the MA approval. Accordingly, the NPC decided to extend the implementation of the pilot project for one more year to further evaluate the MAH system.

Against the above backdrop, the Second Draft DAL Amendments further propose the following:

1. It further clarifies that the MAH shall be responsible for the non-clinical research, clinical trial, production and sales, post-market research, adverse reaction monitoring, reporting and handling of drugs, specifically:

- It requires MAH to establish drug quality assurance system and have drug quality personnel to be independently responsible for drug quality control (Article 27);

- It also requires MAH to sign quality assurance agreements with their contract manufacturers, distributors for drug production, sales, storage and transportation etc. MAH shall also conduct regular review of the quality control system of their contract manufacturers/distributors to provide assurance of continued capability of quality management (Articles 26, 27, 30 and 31);

- It imposes an obligation on the MAH to implement drug product post-market risk management plan, which requires the MAH to conduct post-market research and adverse reaction monitoring (Articles 72 and 74).

2. It allows MAH to transfer their MA approval documents to a third party upon NMPA's permission, provided that the transferee has the capability of performing the obligations of a MAH, including the obligations of drug safety assurance, quality control, risk management and compensation liabilities (Article 36). This appears to be China's measure to optimize the structure of the pharmaceutical industry. In the pilot project, there have been attempts to encourage subsidiaries of sizable pharmaceutical group to transfer their MA approvals to their parent company, in that way the parent company can properly allocate resources based on the production capacity of their subsidiaries and be responsible for quality of the products marketed by their subsidiaries[ii].

4. Conditional MA approval of drugs for an urgent public health need

According to the Second Draft DLA Amendments, for drugs to treat serious life threatening disease with no comparable treatment options and drugs for an urgent public health need, a conditional MA approval can be granted if mid-stage clinical data can predict clinical benefits (Article 23).

It also requires that the MAH shall take risk management measures for conditional approved drugs and the relevant R&D for the drug shall be completed within the designated period stated in the MA approval. The NMPA has the power to withdraw the MA approval for conditional approved drugs if the R&D cannot be completed within the time limit or it has been confirmed that the risks of the drug outweigh its benefits (Article 77).

In response to the regulatory and drug safety challenges in the rapidly expanding E-Pharmacy market, the Second Draft DAL Amendments propose (Article 58):

1. Any drug online sales third party platform shall be recorded with the local drug administration;

2. Drug online sales third party platforms has the obligation to check the qualifications of MAH or drug distributors who intends to conduct online drug sales via the platform;

3. If the MAH/drug distributors' online sales activities via the third party platform violate the law, the third party platform shall immediately take measures to stop the illegal activities and report to the local drug administration;

4. MAH/drug distributors are prohibited to provide online sales of prescription drugs via a third party platform.

Under the current regulatory regime, companies who can provide online medication transaction services to consumers are only allowed to sell non-prescription drugs i.e. OTCs in China. The Second Draft DAL Amendments further tighten the regulation on this area, which caused a lot of debate during the NPC deliberation meeting. The majority of NPC representatives were of the opinion that it is impractical to rule out all possibilities of online sales of prescription drugs, the key is to what extent this should be allowed. There has been suggestion that a negative list can be provided to prohibit e.g. narcotic drugs, psychotropic drugs to be sold online. Others called for improvement on the management system of prescription drugs and non-prescription drugs, and online sales of prescription drugs could be allowed, e.g. if prescription issued by a qualified medical practitioner is provided and the prescription records shall be kept by the platform for two years.

6. Tackling the problems of high drug prices and drug shortages

The relevant measures suggested by the Second Draft DAL Amendments include:

1. The State will monitor drug prices, conduct surveys on cost when necessary, strengthen drug price supervision and inspection, investigate and punish drug price violations in accordance with the law (Article 78);

2. An early warning system of drugs in short supply shall be established (Articles 88 and 89);

3. Priority review and approval can be granted to drugs in short supply (Art 90);

4. The State Council has the power to limit or prohibit the exportation of drugs in short supply. If necessary, the State Council can take appropriate measures such as price control or importation of drugs to ensure the drug supply (Article 91);

5. MAH, drug manufacturers and drug distributors have the social obligation to ensure the production and supply of drugs (Article 92).

In recent years, China has been taking a series of actions to lower drug price, including conducting price negotiations with domestic and foreign drug manufacturers to add more anti-cancer drugs into the basic medical insurance reimbursement list[iii], removal of import tariffs on anti-cancer drugs and reducing the VAT for certain rare disease drugs[iv], etc.

7. Penalties of violation and punitive damages

In addition to illegal activities of drug manufacturing and drug sales, the Second Draft DAL Amendments also provide that the relevant parties could be subject to administrative penalties if:

1. A MAH, a drug manufacturer, a drug distributor or a medical institution fails to monitor or report adverse drug reactions (Article 118);

2. Where the MAH is an overseas company, its representative office or designated business entity in China fails to fulfill its MAH obligations in accordance with the law (Article 121);

Furthermore, fabricating and spreading false drug safety information can face administrative penalties and even criminal liabilities if it is a serious violation (Article 138).

The amount of fines in the Second Draft DAL Amendments has been further increased in response to feedbacks on imposing more severe punishment against illegal drug related activities. For example, the fine for unlicensed production and operation of drugs is raised from 2-5 times to 10-30 times of the drug product value. The fine for production and sale of counterfeit drugs is raised from 2-5 times to 15-30 times of the goods value. Meanwhile, the legal representatives, management directly responsible for the production and sale of counterfeit or inferior drugs will be punished and enjoined from drug production and operation for a life time. They can also be pursued with administrative detention or even criminal liabilities. (Articles 109, 110 and 112)

If the production or sale of counterfeit and inferior drugs is a wilful violation and results in death or serious health damage, the victim can claim punitive damages in civil actions. (Article 136)

Compared to the First Draft DAL Amendments, the Second Draft DAL Amendments provide more substantial changes to improve regulation on different stages of drug product life-cycle management by taking into account the experience and achievements of China's medical reform. The Second Draft DAL Amendments have attracted great attention: the NPC website[v] showed 8,443 comments from the public were submitted to NPC for consideration. In accordance with the legislative process, significant amendments to laws will require 3 deliberation meetings by the NPC. Whilst there is no clear indication about the timeframe for the next meeting, we expect that there will be further changes to the draft.